Document k9zqONYnRwV74kon4xLOwEDnD

Eaton Corporation JManagement's Discussion andAnaiySiS ofFinancial Condition andResults ofOperations Forward-Looking Statements The Company has included in this Annual Report expectations for 1996, an outlook concerning the Aslan situation, certain anticipated effects of strategic moves, market expectations, and expectations tor capital spending. Actual results could differ materially from these forwardlooking statements since they inherently are subject to risks and uncer tainties. Important factors which could cause such a difference include: continuity of business relationships with and purchases by major customers, product mix, competitive pressure on sales and pricing, increases in material and other production costs which cannot be recouped in product pricing, costs associated with correcting the Year 2000 issue, difficulties in introducing new products as well as global economic and market conditions. Truck Components sales decreased 10% in 1996 from 1995. Exclud ing the effects of CAPCO, Truck Components sales declined 13% from the prior year's level. This reduction was primarily the result of the soft ening of the North American heavy-duty truck market from the record levels experienced in the prior two years. Passenger Car and light Duty Components experienced record sales in 1996, rising 10% over 1995, despite Rat passenger car produc tion in North America and Europe. This better-than-market performance was attributed to selected market share penetration and the continued trend towards multivalve engines. Continued demand for hydraulic components from the agricultural, construction and industrial markets enabled Off-Highway Vehicle Components to report record sales in 1996, rising 4% over 1995, despite generally flat market activity. 1996 Compared to 7995 Net Sales Worldwide sales in 1996 reached nearly $7 bllQon for the first time in the Company's history, slightly above 1995. During 1996, the Company benefited from the diversity of its product Ones as well as from its global markets as the highest sales growth occurred in interna tional markets. In 1996, sales for North America, which includes the United States and Canada, and Europe were Rat compared to 1995. Despite the con tinued recession in Japan, sales in the Pacific Region rose 9% in 1996 over 1995, due in part to the acquisition of the Emwest electrical switchgear and controls business In May 1995. In Latin America, sales Teased 3896 in 1996 over 1995 despite economic weakness in Mexico, _,razil and Argentina. The increase in Latin America was attributable to the acquisition of CAPCO Automotive Products.Corporation. On April 16, 1996, the Company purchased CAPCO. a Brazilian manufacturer of transmissions for light- and medium-duty trucks and transaxle compo nents for passenger cars, for $135 million. Electrical and Electronic Controls, the Company's largest segment, continued to experience growth in sales in 1996 as sales increased 796 In 1996 over 1995, which more than doubled from just three years ago. Activity in the markets served by this segment was more mixed in the second half of 1996 than earlier in the year. Aided by continued strength in Cutler-Hammer's electrical power distribution equipment business, Industrial and Commercial Controls sales rose 696 tn 1996 over 1995. New program launches in the North American automotive controls business and the acquisition of the IKU Group in May 1995 contributed to the Automotive and Appliance Con trols' 896 sales increase in 1996 over 1995. Specialty Controls sales increased 10% in 1996 over 1995 in spite of the sharp downturn in the worldwide market for semiconductor capital equipment in the second half of 1996. Sales of semiconductor equip ment stabilized in the second half of 1996 at 23% below first half levels. Vehicle Components segment sales decreased 4% in 1996 from 1995. The acquisition of CAPCO affected prior year results compar isons. Excluding the effects of CAPCO, 1996 sales for this segment were $2.88 billion. 7% below 1995. Operating Results Income from operations declined 17% in 1996 from 1995. This reduction was primarily attributable to lower sales of Truck Components, offset by increased sales of Electrical and Sec tion1c Controls, which historically have had a lower gross margin. The decrease also resulted from increased costs associated with various major growth programs designed to accelerate the Company's sustain able growth rate in the years ahead. During 1996, the Company spent $37 million more than in 1995 on these major growth programs. Income from operations in 1996 was also markedly affected by $50 million of restructuring charges. These restructuring charges princi pally related to workforce reductions. Several business units took these charges in order to bring the CompanyIs performance back to targeted levels. Operating profit for the Electrical and Electronic Controls segment continued to be strong and improved 8% in 1996 over 1995. Restructur ing charges of $16 million reduced operating profit The Improvement in oprerating profit was primarily attributable to improved sales volumes and added contributions from acquired businesses. Oprerating profit for the Vehicle Components segment decreased 31 % in 1996 from 1995. Excluding the effects of the April 1996 acquisi tion of CAPCO, 1996 operating profit was $302 million, a decrease of 27% from 1995. Operating results in this segment varied sharply by business unit and geographic region. Despite the disappointing results, most of the business units included in the segment demonstrated excellent performance throughout 1996. The reduction in operating profit was primarily attributable to lower sales volumes of Truck Com ponents. The segment's operating results were below the Company's expectations given its earlier projection for a 22% downturn in the North American heavy-duty truck market in 1996 from 1995. Vehicle Components operating profit for 1996 also was reduced by $34 million of restructuring charges, which included $15 million to con tinue the restructuring of the North American Axle and Brake business unit for the purpose of bringing these business units to acceptable lev els of profitability. Of these restructuring charges, $19 million was recorded in the fourth quarter of 1996, principally related to the seg ment's Latin American and European operations. -SB. T